This is a term that is widely used and carries many meanings and connotations.
Some people love the word, “profit”, and resonate with how it means you can help more people. For others, there’s a disconnect, and they feel it is only for greedy individuals in this world.
Profit, in essence, is a gain. You profit when you trade something, to get something else you value more. A client will pay a lawyer in currency, to get that thing they value more, the legal advice. An employee will trade their time for a paycheck. Likewise, an employer will trade money in exchange for having the employee complete a task or tasks for them.
Everyone in life is making a profit each day, or they wouldn’t be doing the activity. Unfortunately, most go through the motions no longer paying attention to the profit they receive. In a perfect world, we would all be aware whether the exchanges we are making throughout the day are giving us a “return” or an “increase in value” to what we want.
So, in essence, the term profit is NOT a bad word. It is merely an indicator.
In business, the term ,“profit”, also gets used in many contexts.
Let’s explore a few versions.
Net profit tells us how much money remains at the end of the day after all expenses, including taxes and various other expenditures, have been taken out of the revenue. This helps you understand how much money is left over to pay debt, pay for new capital expenditures, or take home some of the money as profit. This is the most common term business owners’ reference.
But if you are a good money manager, you also understand the other business terms involving “profit”.
Gross profit gives us clarity on whether or not the price of our product or service covers the cost of goods sold (variable costs) and still leaves us ample funds to pay for the operational activities (fixed costs) and profit. You can calculate your gross profit margin by taking your total revenue less costs of goods sold, and then divide this by the total revenue. This creates a percentage. If your gross profit margins are not where they should be, this will give you clear indicators that you need to be more efficient in your production or find alternative ways to reduce cost. This is very important for businesses so they can assess whether each individual product or service is profitable. Bottom line, if your gross profit margin is not adequate, you will have a challenging time increasing your net profit margin… which means there will be very little left to grow the business.
Operating profit is the profit after variable and fixed costs are deducted, but it doesn’t include certain financial costs. It is often referred to as EBITA, (Earnings before Interest, Tax, Depreciation and Amortization), because it doesn’t deduct those financial costs.
For most small businesses, the goal, plain and simple, is to be PROFITABLE. Unfortunately, you can be in the black on the bottom of the profit and loss sheet and still not come up as profitable if the debt of the company continues to grow.
Now, to be clear, any business owner can be profitable. What stops most people is that it can be uncomfortable to price and sell sufficient quantities to ensure that revenue exceeds all expenses and still leaves profit at the end of the day. However, if you want it badly enough, if you’re willing to do what it takes, and not settle, but keep at it until you hit your real goal, profitability can be reached.
This is why it is essential to remain in the mindset, “if there’s something I want, I need to go help more people, and so long as those additional products or services have a solid gross profit margin, those sales will fund that next step or desired expenses.”
Profit is NOT a bad word. It is a dimension to help business owners have options to reinvest in their people, their marketing, their products, and their future. It is a tool to help establish if there are sufficient sales or if there needs to be more sales to make a business profitable.
Understand these different profit numbers, and your business can grow and thrive.
Kristen David, a former trial lawyer and partner who went from working 85 hours a week and being a slave to her law firm, built it up to a million-dollar-plus business, then sold her shares and pivoted into a business coach guru. She is now an international speaker, bestselling author, and operates a successful business, empowering business owners to build thriving, profitable businesses that are self-managed with systems. She helps busy business owners build those systems by implementing policies and procedures the Fast Track Way.